When a share falls 39% in a year there is usually a strong reason. That has happened at ITM Power (LSE: ITM). But what has caused the slide? Is it a deep-rooted concern that would put me off buying the shares? Or could it be that the market has marked the shares down unreasonably, potentially giving me a buying opportunity for my portfolio?
Renewable energy shares
Before getting into the details of the ITM Power share price movement, I think a quick recap is helpful. UK-based ITM Power is one of the pioneers in hydrogen energy. It uses an electrolysis process to turn water and electricity into hydrogen energy.
Like many other renewable energy shares, ITM Power has attracted a lot of attention in recent years. As the industry is still in a formative stage, capital expenditure costs tend to be high. ITM, for example, has already built a large factory in Sheffield and is planning another nearby. It now has over 350 full-time staff and expects to add another 100 as it keeps scaling up.
But typically, revenues follow such capex costs fairly slowly. A company like ITM needs to test its technology, figure out the logistics of manufacturing at scale, find routes to market and then secure customer contracts. That all takes time and money.
ITM Power share price slide
Time and money are not always in equal supply from growth investors. So far, money has not been a problem for ITM Power. It raised another £242m in November and was sitting on cash of almost £400m at the end of January. In fact, one of my concerns about the shares is the possibility that the company will dilute existing shareholders in future to raise more funds. It has a track record of doing that.
But while money has been gushing into ITM Power lately, investors have been less generous with their timeframe. I think that partly explains the share price slide. Although the company has a market capitalisation of almost £2bn, commercial progress is fairly slow. For the first six months of its current financial year, revenue was only £4.2m. The company made a loss in the period, yet again, and burned through cash of £11.8m.
I think the tumbling ITM Power share price reflects investors becoming increasingly impatient at the slow commercial progress being made.
What next for ITM Power shares?
Will that continue? After all, the company’s manufacturing footprint now means it can produce at scale. The company’s contracted backlog of orders more than quadrupled between January last year and the same month this year. ITM’s technology is increasingly finding its way to market, which could help create more customer awareness and enthusiasm for it.
Despite that, I continue to be concerned that ITM Power looks overvalued even after its share price fall. There is clear commercial progress being made. But the topline remains small, while commercial development brings additional costs that mean the bottom line will likely stay in the red for the foreseeable future.
To me, it is hard to justify a price tag of almost £2bn for such a business. I will not be adding ITM Power shares to my portfolio.